National Restaurant Association of India & ORS v. Union of India & ANR
SUBMITTED BY
SONAM KUMARI
Course- “BBA.LLB”
BATCH-2024-29
SYMBIOSIS LAW SCHOOL, NOIDA
SYMBIOSIS INTERNATIONAL DEEMED UNIVERSITY
Introduction
The “Consumer Protection Act, 1986” was enacted to provide for better protection of the interest of the consumers. In this regard, provision was made for the establishment of consumer protection councils and other authorities for the settlement of consumer disputes, etc. The government found that even though, the working of the consumer dispute redressal agencies has been serving the purpose to a considerable extent under the said act, the disposal of cases was not fast due to various constraints such as procedural bottlenecks, backlog of cases, shortage of staff or other administrative issues. Furthermore, several shortcoming are stated to have been noticed while administering the various provisions of the said Act.
Since the enactment of the Consumer Protection Act, 1986, markets of goods and services have undergone drastic transformation. For example, a modern markets for goods and services. There is an emergence of global supply chains, which has led to a rise in international trade and the rapid development of e-commerce. As a result, new delivery systems for goods and services have been adopted. These factors have rendered the consumer vulnerable to new fairs of unfair trade and unethical business practices, like misleading advertisements, telemarketing, multi-level marketing, direct selling and e-commerce pose new challenges to consumer protection. All this requires appropriate and swift executive interventions. In order to address the myriad and constantly emerging vulnerabilities of the consumers, need was felt to amend the Act. In view of this, it is proposed to repeal and re-enact the Act.
In the year 2019, a fresh Consumer Protection Act came into existence. This act envisaged provisions for product liability action on account of harm caused to consumer due to a defective product or by a deficiency in services. Furthermore provision of “Mediation” as an Alternate Dispute Resolution Mechanism has also came to be introduced. Several other provisions acme to be incorporated in the Act aiming at simplifying the consumer dispute adjudication process of the Consumer Disputes Redressal Agencies.
Facts
This case arise from a challenge by the national Restaurant Association of India (NRAI) and the Federation of Hotel and Restaurant Association of India (FHRAI) to guidelines issued by the Central Consumer Protection Authority (CCPA). The Delhi High Court, in a ruling on April 12, 2023, asked industry organizations to investigate the possibility of altering the name of “service charge” to “staff welfare charge”, with a view to allaying the concerns of customers who believed that the charge was a government tax. Further, on July 4, 2022, the Supreme Court made a recommendation to the CCPA for the establishment of standards that would prohibit hotels and restaurants from automatically collecting service charges. The court also stressed that customers should not presume that the service charge has received court approval. The Delhi High Court order, dated July 20, 2022, which had stopped the Central government’s proposal to prohibit restaurants and hotels from adding service charges to meal bills, was stayed by this Supreme Court judgment after the CCPA filed an appeal against it. The Petitioners, representing numerous establishments, contended that these guidelines were arbitrary, impacted their established business practices, and sought their quashing.
Issues
- Whether the collection of mandatory Service Charge by restaurants and other establishments is permissible under the Consumer Protection Act, 2019 (hereinafter, the ‘CPA, 2019’)?
- “Whether the guidelines issued by the Central Consumer Protection Authority (CCPA), prohibiting the mandatory levy of the service charges, are legally valid and enforceable?
Rules
Section 2(5) of the Consumer protection Act, 2019 defines what constitutes a valid complaint that can be filed under the Act.
Section 2(6) of the CPA, specifies who is eligible to file complaint under the Act.
Section 2(7) of the CPA, defines who qualifies as consumer under the act, determining who is protected by its provisions.
Section 2(8) of CPA, explains what constitutes a dispute that falls under the jurisdiction of the consumer protection mechanisms.
Section 2(9) of CPA, lists the key rights granted to consumers under the Act.
Section 2(41) of the CPA, defines unfair trade practice and specifies what actions or practices qualify as restrictive trade practices, which are prohibited under the Act.
Section 2(47) of the CPA- defines unfair trade practice and specifies what actions or practices qualify as unfair trade practices, which are prohibited under the Act.
Section 10 of the CPA, Establishes the Central Consumer Protection Authority (CCPA) to regulate matters related to violation of consumer rights, unfair trade practices, and false or misleading advertisements.
Contention
Petitioner
The petitioners, National Restaurant Association of India(NRAI) and Federation of Hotel and Restaurant Associations of India (FHRAI), represent a substantial segment of the hospitality Industry of India, including lakhs of restaurants and hotels across the country. They assert that the impugned guidelines adversely affect the interest of their members and the industry at large. The petitioner seek quashing of the Central Consumer Protection Authority (CCPA) guidelines dated 4th July 2022, arguing that these are arbitrary, untenable, and liable to be set aside. They contend that the guidelines violate their members right to carry on business as guaranteed under Article14 and 19(g) of the Constitution of India. The collection of service charge has been a well-established and prevalent practice in the hospitality industry for over 80 years. The petitioners argue that there is no law prohibiting the levy of services charge by restaurants and hotels and various courts and the Monopolies and Restrictive Trade Practices Commission have recognized its validity. The petitioners maintain that the decision to levy a service charge is a matter of managerial discretion and forms part of the business model of establishments. The proceeds from service charges are used for the benefit of staff, including backend and utility workers, and are not solely for the owners’ profit. The petitioners point out that earlier advisories from the Ministry of Consumer Affairs (dated 14th December 2016 and 21st April 2017) only required that the payment of service charge be made voluntary and clearly disclosed, not outright prohibited. Further Petitioners argue that the CCPA lacks the statutory power under the “Consumer Protection Act, 2019” to issue guidelines that effectively prohibit the collection of service charge, as this impinges upon their fundamental right to conduct business. The practice of levying service charges is not unique in India but is prevalent worldwide. The petitioners further submit that the judiciary and regulatory bodies have previously recognized the legitimacy of service charges, and thus, the guidelines are contrary to established law and practices.
The impugned guidelines dated 4th July, 2022 issued by the CCPA impinge upon the rights of the Petitioners guaranteed under Article 19(1)(g) of the Constitution of India inasmuch as it interferes with the right to trade which is conferred upon the owners of such establishments. The establishment ought to have the freedom to price its goods in the manner it chooses, either by setting a price for the food product itself or by distributing the cost between the price of the food product and the service charges. So long as the customer of such establishment is informed that the payment of service charge is compulsory, by way of displaying it both the menu card as also display the board, it becomes a contractual issue between the restaurant establishment and the consumer. The service charge component is a mojor component in the negotiation of wages with the employees of these establishments and, thus, the same ought not to be interfered with in this manner by the Authority established under the CPA, 2019.
Respondent
The NRAI and FHRAI are making inflated claims regarding their membership numbers. Their actual membership is significantly lower, undermining their claim to represent the entire industry. This challenges their assertion that the guidelines will have a widespread detrimental impact. The CCPA’s guidelines do not restrict restaurants from setting their prices for food products and other items. Establishments remain complete freedom to price their offerings as they choose. They can factor in all costs (including labour, rent, utilities, etc.) when determining menu prices. The guidelines do not impinge on the freedom to trade guaranteed under Article 19(1)(g) of the Constitution. Restaurants are still free to conduct business and set prices. The core issue is preventing restaurants from unilaterally imposing a mandatory service charges on top of those process. Consumers cannot be forced to pay a service charge. The power of “levy” or impose a charge is a sovereign function of the state Restaurants cannot usurp this power by presenting a service charge as though it were levied by the government or mandated by law.
Consumers argue that the automatic or default inclusion of a services charge is unfair because it is non-transparent and they often not informed that it is voluntary. Many customers are not aware of their right to refuse to pay the services charge. Major chunks of hotel and restaurants deceived consumers into paying hidden charges associated with restaurant services (lighting, etc.), due to this they believe they are being forced to pay. The services charge is imposed regardless of the consumer’s satisfaction with the services. The addition of the service charge violates section 171 of the CGST Act, as it increases the overall tax burden on the consumers. Consumers argue that hand dryers, toilet tissues, and sanitary conditions should be factored into the overall earnings of the restaurant and not charged separately. They also concerned that the service charge does not necessarily benefit the serves and may instead be used to reduce the restaurant’s running costs. They believe that the services charge is Government tax, and they question the legality of it being imposed by restaurant.
Reliance is placed upon “Assistant Collector of Central Excise v. National Tobacco Co.” to argue that the word levy or levying of any tax charge is a sovereign function. The writ petition is highlighted to argue that in the said petition, it is the stand of the Petitioner that the service charge is not a tip and the consumer is required to pay the same whereas in the representations made to the Government, the exact opposite was stated by the association itself. Reference is made to the representation dated 2nd June, 2022 where service charge is acknowledged to be colloquially known as the “Tip”. The services charge is being misrepresented as a tip or gratuity. A genuine tip is voluntary and reflects satisfaction with the services, whereas the mandatory service charge is regardless of service quality. The representation dated 24th June 2022 clarifies that the service charge is being labelled as tip. The CCPA’s authority to issue the guidelines stem from section 18(2)(i) of the Consumer Protection Act, 2019, which empowers it to prevent unfair trade practices and protect consumer interests. The authority also has the power to issue guidelines to prevent unfair trade practice and to protect consumer interest. Section 10 of the CPA, 2019 grants the CCPA broad powers to regulate:
- Violation of consumer rights
- Unfair trade practices
- False or misleading advertisements
- Actions to protect, promote, and enforce consumer rights.
The CCPA received numerous complaints regarding the mandatory levying of service charges, the misrepresentation of the charges as a government-imposed tax, and coercive measures used to collect the charge. The authority could not ignore these complaints and was obligated to act to protect consumer interests. The current guidelines (a) the Ministry of Consumer Affairs engaged with the Hotel Association of India as early as 2015. (b) Despite assurances that the service charge was discretionary, restaurants continued to charge it in a mandatory manner. (c) Subsequent guidelines in 2017 clarified that prices should cover both goods and services and that tips should be at the consumer’s discretion, are the result of a long history of attempts to address the issue of mandatory service charges. The guidelines from April 21, 2017, mandated that establishments provide clear bills, display notices about the voluntary nature of the service charge, and leave the service charge column blank. However, these guidelines were not consistently followed, necessitating further action. The lack of consistency in the amount charged as service charge (ranging from 12% to 15%) and the use of confusing terminology (VSC, SC, SER, etc.) further contributed to consumer confusion and the perception that the charge was mandatory. The said complaint raised multiple issues:
- Service charge being made mandatory by the establishments.
- Service charge being touted as a charge being levied by the Government.
- Coercive measures undertaken by the establishments to force the consumers to pay service charge, even when they were dissatisfied with the service.
- Measures such as employment of bouncers etc., being used for collecting service charge.
- No consistency in the amount being charged as service charge. Some establishments were charging 15%, some 12% and some 13%. Complaints as to terminology used for service charge was also not uniform and was creating confusion. In the bills the terms being used were VSC, SC, SER, etc.
These arguments assert that the CCPA’s actions are justified and necessary to protect consumers from deceptive and unfair trade practices, and that the restaurants retain adequate pricing freedom without the ability to impose mandatory service charges.
Rationale
The court emphasized that restaurant and hotels cannot automatically impose a service charge on customers bills. Any such charge must be made transparent and cannot be included by default. The court clarified that service charges and voluntary and discretionary. Customers must be clearly informed that paying a services charge is optional, and they cannot be compelled to pay it. The judgment recognized that restaurants are free to set their own prices for food and beverages. The cost of service can be factored into these prices. However, charging anything over and above the menu price (plus applicable taxes) without explicit customer consent is not permissible. The court held that restaurants cannot deny entry or service to customers who refuse to pay the service charge. Making the payment of a service charge a precondition for service is a restrictive trade practice under Section 2(41) of the Consumer Protection Act, 2019. The rationale highlighted that a tip or gratuity is a voluntary reward for hospitality, given at the customer’s discretion after the service is rendered. In contrast, a mandatory service charge imposed upfront is not the same as a tip and cannot be forced upon the customer.
The court noted that if a consumer is charged a service fee against their will, they have the right to:
- Request its removal from the bill,
- File a complaint with the National Consumer Helpline or Consumer Commission,
- Use the e-daakhil portal or approach the district collector for redressal.
The court supported the Central Consumer Protection Authority (CCPA) guidelines, which:
- Prohibit automatic or default levying of service charges,
- Require clear disclosure and consumer consent,
- Forbid using alternative names for the charge,
- Prevent denial of service based on non-payment of service charge.
The court clarified that service charge is not a government tax or levy. Restaurants must not create any impression that the charge is government-mandated. The court’s rationale is rooted in protecting consumer rights, ensuring transparency, and preventing unfair trade practices. The judgment upholds that while restaurants may set their own prices, any additional service charge must be optional, clearly disclosed, and not imposed as a condition for service.
Defects of law
Current consumer protection regulations, although aimed at safeguarding rights related to service charges in dining establishments, contain gaps and necessitate governmental updates. A significant flaw is found in the vague nature of the term “voluntary.” Restaurants frequently portray service charges as compulsory, taking advantage of consumers’ lack of awareness. There is a pressing need for clearer legal definitions and stricter enforcement measures to guarantee real voluntariness. Additionally, there is a need for reform regarding the absence of explicit legal measures that outright ban mandatory service charges. Although the CCPA guidelines are in place, their legal enforceability has been questioned. Establishing these guidelines in law would enhance legal clarity and discourage unfair practices. Moreover, granting consumer courts more robust penalties for non-compliance could serve as a significant deterrent. Lastly, heightened consumer awareness initiatives are vital to inform the public about their rights and empower them to challenge unjust charges. These reforms are crucial for establishing a fair environment and genuinely safeguarding consumer interests.
Conclusion
Service fees or any other price for services may seem reasonable if the consumer is properly informed, but this is not always the case. Whether the service charges will be included is up to the parties. Before making an order, the parties must be informed. Those who oppose may choose not to pay. The cases discussed show that hotels and restaurants that do not have the permission to collect service charges are doing so, and there is no record of the charges thus collected being distributed to the staff of the restaurant. Unethical business practices and a lack of openness are concealed under the term “service charges.” Since there are no regulations with regard to record-keeping or disbursement, it is possible for funds that are collected in the name of employees to be directly added to the earnings of enterprises without being immediately reported. Businesses are pressuring customers to pay service fees regardless of whether or not they wish to receive the service; this undermines the objective of the service business, which is to provide the highest possible level of service.